Rates raise questions over LRBAs

Changes to restrict limited recourse borrowing arrangements (LRBA) inside an SMSF to business real property acquisitions have come at a time when interest rates have pushed related-party loans to high levels, making that option less attractive, according to a technical specialist.

Smarter SMSF education and technical manager Tim Miller said while the standard rules around LRBA borrowings had not changed under the new provisions regarding residential property, the safe-harbour rates for related-party loans may be of concern to some SMSF borrowers.

“This is an area we have watched with real interest over the last few years because when the safe-harbour rules were introduced in the 2017/18 financial year, we have seen these nearly double,” Miller said during a recent presentation hosted by SuperGuardian.

“The rates started around 5 per cent with regards to property and add a couple per cent more for listed share-style borrowings from a related-party loan perspective.

“What we have seen now is the May 2026 [Reserve Bank of Australia] interest rate … and 9.35 per cent is the rate we have for 2026/27.”

He added this had increased from 8.95 per cent from the 2026 financial year, while the rate for listed shares had risen from 10.95 per cent to 11.35 per cent.

“This is taking us back to where the LRBA rates were three years ago and from that point of view you have to look and ask: ‘Is there value still in doing related-party loans and paying that additional amount of interest from a safe harbour?’” he said.

“There is value if your objective is to avoid non-arm’s-length income for the fund, but it is a high rate to pay, particularly when you are measuring it against some of the commercial opportunities out there, which are generally in the high 6 to 7 per cent range for LRBAs.”